Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Healthy business risk profile, supported by strong execution capabilities and established brand position:

The Sobha group is among the leading residential real estate players in Bengaluru. It has developed residential real estate and contractual projects of 1,147.2 lakh sq ft as on September 30, 2021. It has ongoing residential projects of 305.9 lakh sq ft (excluding completed and forthcoming projects) and contractual projects of 59.0 lakh sq ft. Strong execution capabilities are reflected in the quality construction and timely completion of projects. The group has expanded to Kozhikode, Chennai, Cochin, Coimbatore, Gurugram, Mysuru, Pune and Thrissur. It has diversified into the contractual business, and manufactures interiors, concrete products, and glazing and metal works. These businesses contributed to 22% of the total collections for the first six months of fiscal 2022, and the contribution should remain stable over the medium term

Moderate, though improving, financial risk profile:

Financial risk profile is characterised by moderate operating cash inflow. Healthy sales and collections in the first half of fiscal 2022 enabled the group to lower debt and improve gearing. The group has an intent to lower its net gearing levels to 1.1 times in the near term, and is continuing to focus on keeping debt levels under check

CRISIL Ratings expects the group to generate operating cash inflows (including contracts business) of over Rs 2,500 crore per annum in the three fiscals through March 2024. Furthermore, while annual debt obligation is sizeable, financial flexibility is supplemented by the group's demonstrated refinancing ability, access to unutilised bank limit of over Rs 1000 crore, unsold inventory of Rs 10,643 crore and 2,120 lakh sq ft of developable area across major micro markets in the country as on September 30, 2021. The group can also utilise part of its non-fund based limits (up to Rs 200 crore) for payments to suppliers, limiting the pressure on fund-based bank lines. CRISIL Ratings does not expect additional land purchases by the Sobha group under current market conditions, obviating the need to add debt over the medium term

Weakness:

High debt because of historical debt-funded land acquisitions:

The group had undertaken debt-funded land purchases historically, with a large portion of debt being used for purchase of land. Though collections have grown in recent years, debt had been increasing till fiscal 2020 owing to continued land acquisitions and ongoing construction. Nevertheless, land acquisition spends significantly fell in fiscal 2021 and first half of fiscal 2022 given subdued market sentiment on account of the pandemic. Consequently, gross debt and net gearing decreased to Rs 2,933 crore and 1.13 times as on September 30, 2021, from Rs 3,208 crore and 1.30 times, respectively, as on December 31, 2019. The group is expected to focus on reducing debt and maintain net gearing at 1-1.1 times over the medium term. Material increase in debt, resulting in net gearing exceeding 1.5 times, will be a key monitorable. Purchase of large land parcels, if any, is likely to be undertaken through the special purpose vehicle in joint venture with private equity partners

Exposure to risks and cyclicality inherent in the real estate sector:

Cyclicality in the real estate sector may result in volatility in cash inflow and sales. In contrast, cash outflow, such as for debt servicing, is fixed. Any decline in demand may adversely impact sales and collections, disrupting the debt improvement trajectory. Sobha generates over two-thirds of its revenue from Bengaluru, and a sizeable chunk of its customers are from information technology/banking and financial services sectors, where salaries are stable and hence unlikely to affect collections of ongoing projects